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February 20, 2013

Yes, Financial Literacy Is a Problem—That’s What Advisors Are For

With studies showing little progress in teaching personal finance, one advisor explains how it’s done in his office

Probably nothing comes as close to motherhood and apple pie in the realm of economics as financial literacy, a wholesome concept that seemingly everyone can embrace.

Yet surprisingly, the cause of financial literacy has taken a bit of a beating in recent years. Last week, the hoary British newsweekly The Economist published an article (“Teacher, Leave Them Kids Alone”) pointing out the disappointing results of such programs.

The article cited research by Lauren Willis of Loyola Law School in Los Angeles suggesting that the checkbook-balancing-type curriculum these programs offer may be no match for the complex products and decisions consumers must make.

Harvard Business School professor Shawn Cole and Wellesley economics professor Gauri Kartini Shastry have also dogpiled on financial literacy. In a December 2010 paper, the two scholars showed that state-mandated high school financial literacy programs failed to encourage savings behavior, a basic goal of such programs.

While the academic war rages on, AdvisorOne readers likely feel they are on the front lines of the financial literacy battles they confront daily in their efforts to help clients plan for various lifecycle goals. In that spirit, we asked Merrill Lynch advisor Aubrey Lee Jr. (left) how financial literacy rates in the daily conduct of his Detroit-area practice.

A financial advisor for nearly 26 years, Lee has addressed financial literacy issues on a volunteer basis, usually in the context of high school “Career Day” type events, though he has specifically addressed long-term financial planning issues as well.

Nevertheless, it is in daily interactions with clients where the advisor, who heads the Aubrey Lee Jr. Group in Merrill’s Novi, Mich., office, most regularly confronts literacy issues.

“When I work with clients, I think it’s important to be on the same side of the table in terms of my clients having a basic knowledge around how stocks work, how bonds and fixed income work…I’m least comfortable when a client says, ‘Aubrey, I trust you, just go ahead and do it.’”

The academics have various ways of measuring financial literacy, but Lee’s got his own definition based on his many years dealing with the needs of his Midwestern clientele. It boils down to having a common vocabulary to discuss financial issues.

“It’s about understanding the basics, so that when I say I’d like you to put 30% of your money into a class of investments like stocks or bonds, if I use a word like ‘cash’ you know it may be a money-market fund.

“If I talk about a muni bond, you know I’m talking about debt,” Lee continues. “Then when we talk about asset allocation, we have a certain amount of money in stocks, bonds, money-market funds and cash, and why that is important. From there we can become a little more granular.”

Despite the efforts of financial literacy promoters, or perhaps as an indicator of their inefficacy, financial concepts and products with which financial advisors work daily are often quite bewildering to non-professionals.

Lee advises on a number of corporate 401(k) plans, and regularly goes over the basics at quarterly meetings, and in meetings with individual participants.

“We approach planning from a goals-based wealth management strategy,” Lee says, meaning he does not map out a plan before ascertaining “what is important to [the client] in the next one to three years; in the next three to five years; and for five years and beyond.”

In his more than a quarter-century of advising, Lee has seen an impact from his educational approach.

“I think about the families I have that have children at an early age that learned about investing and saving. What I have seen is that those offspring tend to be more responsible—better savers.”

“To watch a client achieve his or her goal—that’s the real reward that I receive,” he adds.

While that next generation of clients is already opening up 529 accounts for their kids, in some instances, the financial literacy Lee had a hand in initiating took deeper root:

“There was a young man that I had spoken to 20-plus years ago,” he says. “He went on to become a money manager out in San Francisco. There was another young lady who was the daughter of one of my clients. Her parents asked me to speak to her, and she went on to become a financial advisor down in Florida; that was very rewarding.”